Regarding my last column in the Independent Florida Alligator, a reader asked what I proposed should be done. The following is excerpted from my response:
Recognizing the problem is the easy part, changing the situation is difficult. At least part of the solution is to end double taxation of corporate profits. The last round of tax cuts decreased the rate from 38% to 15%, but corporate profits are still being taxed twice.
The way I see it, no corporation in the history of the world has ever paid taxes to begin with – the cost is always passed on to the consumer – so the whole idea of a corporate income tax doesn’t make sense, but at the very least, one side or the other of profits should be taxed, not both. Personally, I’d like to see income taxes in general abolished and replaced with a flat consumption tax that would encourage savings, not constitute a disincentive to success like an income tax, and still be “progressive” enough to be politically viable (at least on the popular level, I don’t think tax lawyers would ever stand for it).
One of Max Weber’s theories about bureaucracy was that management and ownership should be separate. As a result of Clinton’s executive salary cap, we saw a proliferation of other perks to compensate: retirement benefits, stock options and other perks. Stock options, in part, encourage executives to drive up the price of the stock so they can be exercised – regardless of real value or profit. In that sense, I don’t think the trend towards making managers owners as well has been wholly positive.
I think the shift of focus from dividends to capital gains contributed a great deal to the stock market bubble of the nineties – I’m still doubtful whether it has completely deflated. The democratization of ownership has certainly had unintended consequences. Unfortunately, trying to organize average stockholders to fight in a proxy battle would probably be a losing proposition. The battle, I think, must be fought in the boardroom and in state legislatures. The general thinking seems to be to encourage the CEO to think like a shareholder, and for the board to be as “independent” (from what?) as possible, but I think it more appropriate to encourage the board to think like a shareholder and for the CEO to stick to management.
As a limited-liability corporation is a state-created, state-chartered entity, I don’t have the same degree of reservation that I would typically have about government intervention in the market. Maybe it could be required that those sitting on the board of directors could receive no other compensation from the company other than the dividends received on their stock holdings? That would at least put their interests in line with
shareholders and do well to eliminate conflicts of interest. Or prohibit the CEO from holding stock, compensated instead only by a salary set by the newly profit-oriented board? Somehow, the ties between the board and management should be cut, their respective roles crystalized.